Since December 2020 US long term nominal yields (US Treasury 10y) rose 60 bps, while expected inflation (US Inflation Swap 5y5y) remained flat at ~2.2% Markets incorporate a benign outlook, but inflation will pick up significantly over the next quarters based on statistical effects (y-o-y comparison) and cyclical forces (economic recovery, lower unemployment, higher commodity prices) Therefore, we expect bouts of market volatility as rates tend to rise and equity multiples to shrink.
nominal yield = real yield + expected inflation
The US Fed announced that it will tolerate a temporary inflation overshoot above 2% with its recently implemented “average inflation targeting” framework Nevertheless, should ” inflation move towards 3% or beyond, bond and equity markets will be challenged.
